In our previous blog, we discussed why it is important for a business to create financial reports. We also talked about 5 important ingredients that any SMB owner should consider while preparing the financial reports for their organization. In this blog, I will delve in detail about one of the most important ingredients of a Financial Report which is Profit. As it is rightly said,
Profit is not something to add-on at the end, it is something to plan for in the beginning
There are a lot of numbers you can look at in your financial reports, but what’s the bottom line? Well the fact is that profit is the bottom line – literally at the bottom of the most important financial report – your ‘Profit & Loss Statement’, or a ‘P&L’ as some call it. Profit tells you how much money you are left with after paying all of your expenses. This is a great place to check and see how your business is performing. If you take a look right now at your profit from the last 12 months, what do you see? Is it a big number? Or a negative number?
Did you know?
40 percent of small businesses are profitable, 30 percent just break even and 30 percent are continually losing money!!
The next thing to do is to take a look at the trend of your profit. Is profit trending upward or is profit increasing as compared to the past year? Is it stable? Or is it going downward or decreasing? This trend helps you in predicting your future profit.
One of our clients, an event planning company, noticed that their profit for the current year was half of what it was when compared to the previous year. This didn’t make any sense because they were seeing more work this year than the previous year. Upon closer examination, we found out that their work load had shifted and that most of their jobs this year were paying less but actually required a lot more time. The employees were more comfortable with the new work format, and they didn’t want to go back to the old way. So, to gain their profitability back, they realized they needed to update their fee structure for the incoming projects. They never would have realized this if they hadn’t taken a look at their profitability trend.
Ultimately, if your business is not profitable enough for you to cover all of your expenses and bring in a healthy profit, then what is the point of being in business? As a business owner, you should stay focused on this “bottom line” to ensure that you are achieving the profitability that you want, and need, from your business.
In the next blog, I will delve in detail about the second most important ingredient of a financial report – Expenses.